Wednesday, February 17, 2010

Time To Get Rid of ALL Taxpayer-Financed Housing Bailout Programs

The only way to "cleanse" the system is to let market forces take the housing market to whatever level is necessary to stabilize the market.  It will be a long, painful process, especially for the financiers who fueled the housing bubble, the Government regulators who looked the other way with regard to the massive fraud perpetrated by the financiers and especially for the individuals who overpaid for a house using a mortgage they had no hope of ever repaying barring some kind of miracle.  The "miracle" is not to spread the cost of these problems and decisions over the broad spectrum of taxpayers, many of whom either own their house outright or rent.

The latest policy being implemented is known as HAFA. Here's how it works in a nutshell: It incentivizes short sales and distressed sales, especially in the cases where a 2nd mortgage of some sort is holding up the whole process by taking Taxpayer money and paying the deadbeat borrower $1500 to vacate, $1000 to the people who process the mortgage paper work (the servicers), $1000 to the new "investor" who is buying the property AND $3000 to the second mortgage holders to induce them to sign the papers releasing all liens.  Here is a link to the details:   LINK  Please note that this information is hosted on the website of the National Association of Realtors.

I exchanged some emails with Mark Hanson, of, a.k.a. "Mr Mortgage," who has done an incredible job historically of analyzing and presenting the details of the housing bubble and its demise.  But in his latest public blog post, LINK, he promotes the HAFA program as a means of speeding up the process of distressed housing sales. I'm all for speeding this process up, but not with MY money or Taxpayer money.  Let the market sort this out.  Here's is what I concluded in my email exchange with Mark: 
The failed economics of a bad housing transaction - from the buyer's overpaying and taking on too much debt to the lender willingly funding the buyer's bad economic choice - should not be subsidized by the many who chose not to engage in bad econmic decisions. Why should I be required to reach into my pocket to help an idiot move out his disaster, help the new buyer try to make money on this disaster (many will still fail), partially cover the subordinated lender's mistake, and let the real estate broker make what is ultimately a subsidized commission?

The taxpayers have subsidized enough of the housing disaster. It figures that the NAR loves this program because it ramps up the volumn and velocity of home sales and prohibits the servicer from forcing the real estate broker from taking a hit on a commission. That's total b.s. and I wouldn't be surprised if the NAR was influential in the drafting of this program.

You do great work. But the only way to cleanse the system is to let the market - free from any kind of Govt intervention of any kind - take the market to where it needs to go. This market either naturally or unnaturally is eventually going to go a lot lower.
I concluded with: 
Why do we need any Govt intervention, especially when it involves penalizing everyone by transferring wealth from all of the taxpayers to those who screwed up? In fact, the brokers and lenders have made money every step of the way, a lot of it based on Govt implemented wealth transfers, like HAMP and now HAFA.
If the Govt would just step aside altogether, we can get the nasty process of correcting the problem out of the way. Govt intervention of any sort only drags out the process, makes it worse and unfairly penalizes those who refrained from drinking the spiked kool-aide.
And one more point, the primary lender banks ultimately are not taking losses. Those losses are being monetized by the Fed and the Treasury, whether you realize it or not. The second lien lenders may be the ones holding up the process and maybe HAFA greases the wheels to get them out of the way, but the whole process STILL requires that I reach into my pocket and give everyone at the table some of MY money. At this point, HAFA will only serve to transfer overvalued homes from deadbeats to new "distressed" investors, most of whom will end up walking away once they can't rent out their "investment" or it continues to tank in value, which it will.

Again, all HAFA does is stimulate the velocity and volumn of housing sales, while using taxpayer subsidies to artificially hold up price levels and facilitate continued misallocation of money and economic resources.


  1. Listen Dave, only 6 financial firms held 96% of all derivatives exposure. The US should have let them fail; wiping each others counter party riskout as they all imploded. Instead we shifted the "bailout" to the taxpayer. There is no belief in true capitalism and free markets. We need the gumption to let toxic institutions fail and allow free market capitalism to fill the vacuum.

    It hasn't happened because since Continental Illinois, the bankers have had control of the country and have shifted their losses to the public in every crisis since. Now the SOP is to find a bailout that will to absorb even a home mortgage default. The banks do not take losses.

    How could Hank paulson have let those 6 financial institutions implode? Who would he have had left to have cocktails with? Everyone he knew would have gone broke.

  2. Yup. Actually, several months ago I made a case for why Paulson, Geithner and others should be put under investigation by Special Prosecutor appointed by Congress. It sounds like they were very sloppy with phone usage and emails.

    We knew Atty Gen'l Eric Holder won't ask for that because he's the guy who drafted the Marc Rich pardon letter that Clinton signed the day before he left the White House.

    Problem is, the Congress that should be having them investigated, most of them should be investigated too LOL

  3. I am against the government subside, too.

    However, it will help speed up the cleanup process through short sale and distressed sale.

    It is beneficial because the sale prices are mostly market prices that reflect what the buyers are willing to pay, and facilitate the downward adjustment of prices. The $1000 incentive does not sway the prices that much. I don't think HAFA artificially holds up prices.

    The true artificial support of housing prices are two folds: first, the FHA and other GSEs make the mortgages readily available with little or no down payment; second, the low mortgage rates engineered by the Fed.

    JJ from WSB

  4. Hey JJ: Anything that takes money from taxpayers and allocates it to housing is designed to prop the housing market. They are greasing the junior lienholders, who are largely worth zero, with $3k to get them to sign over their 2nd lien in order to facilitate the sale. The real estate brokers are not required to chip in at all via cutting their commissions. It props up the market as much as the tax credit, if not more, because it's a direct cash subsidy.

    There are plenty of interations the market can go thru in order to solve the problem without Govt misallocation of your and my money.

    Here's one idea: if the Govt would get the fuck out of the way, all these "frozen" pre-foreclosures will pile up and drive down the values even more quickly, the property up-keep will suffer, adding to the degradation of value, and eventually the senior lien lender will be forced to force the issue. The 2nd lien guy goes away with nothing, the bank dumps the home, and the market edges closer to a stabilization bottom without robbing taxpayers like you and me.

    And not only that, the "investors" who are getting a small subsidy are likely taking on loans themselves that many will default on, further kicking the can down the road.

    All HAFA is trying to do is spread the pain around to everyone in a smaller dosage than HAMP or other bigger programs. You and I have no reason to have to feel pain from this.